Impact of Working Capital Management on the Profitability of Shariah-Compliant and Non-Shariah Firms: The Case of Malaysia

Abstract

This paper examines the impact of working capital management on the firm’s profitability using return on equity as its core determinant. Using a sample of ninety listed Malaysian Shariah-compliant and non-Shariah firms for the period 2009 to 2013, this study investigates whether both types of firms react differently to similar firm specific variables. By employing static panel data estimation technique, we document that although the Shariah-comp/law/ firms are subject to certain restrictions, they still efficiently compete with their conventional counterparts in terms of profitability by sustaining a higher return on equity. This might be attributed to better management of their receivables as well as a higher and better inventory turnover as per our empirical results. Thus, it can be assumed that Shariah restrictions have not impeded the performance of Shariah-compliant firms; rather it has helped them in some respects if not all.